Thursday, 29 September 2016

How GST Saved The Economy

We often hear talk of how goods and services are getting expensive because of GST, how GST has been a drag to the economy and how GST is burdensome to businesses and consumers and so on.

But we often missed the bigger picture of the benefits that GST has brought to the government, the people and the economy as a whole.

As you may well already know, crude oil prices had plunged from its peak of $114 per barrel in June 2014 to as low as $29 per barrel in January earlier this year before it recovered to $48 per barrel presently.

In absolute term, government petroleum revenue dropped by RM20 billion in 2015 compared to 2014.In relative term to Malaysia’s government total revenue, petro-revenue dropped from 34% of total revenue in 2010 to 19.90% of total revenue last year:

Percentage of consumption tax to total government revenue also jumped from average 8% (from 2010 to 2014) to 16% in 2015.

GST brought in RM18 billion extra revenue on top of what was collected (SST) before it was implemented in April 2015.

The amount of GST collected by the government, has almost offset the RM20 billion loss in petro-revenue:

Petroleum and Consumption Tax Revenue

As you can see from the chart above, petro-revenue dropped to RM43.6 billion in 2015 from RM64.06 billion in 2014 while consumption tax (SST and GST) revenue increased from RM17.2 billion in 2014 to RM35.27 billion in 2015.

Sales and service tax which are a single-stage tax wouldn’t have offset the RM20 billion loss in petro-revenue.

Had GST not implemented last year, government would have a shortfall of RM20 billion in revenue.

Government budget deficit would have shot up to RM57 billion instead of RM37 billion recorded last year and deficit to GDP ratio would have been 6% instead of 3.2% had it not for GST implementation.

It’s as clear as a bell that GST has saved the government finance but how did GST save our economy?

Malaysia’s government consumption expenditure consists of 13.5% or RM143 billion of GDP in 2015.

If GST hadn’t been implemented, government consumption expenditure would have contracted and SMALL percentage point of GDP would have been shaved off because of the loss in petro-revenue.

Malaysia's government is practicing unwritten law that government operating expenditure (government staff salary, pension, subsidy, debt service charges, asset acquisitions, grants, transfers etc) must be financed by government revenue which means government would not borrow to fund its operating expenditure.The last time government annual revenue could not cover annual operating expenditure was during the 1985-1986 economic crisis caused by sharp plunge in commodity prices.While development expenditure (investments) is funded by borrowings (issuance of government securities).

Contraction in government revenue would mean a reduction in operating expenditure.

If GST wasn’t implemented, government would have to cut its operating expenditure more than it had cut last year and this year.

That means, less subsidy, less cash transfers, no bonuses or salary hike for government staff and many more cuts in budget which would also result in slower economic activity or GDP growth.

GST has been proven as a saviour of the government finance and also the Malaysia’s economy.

GST collected by the government was spent for the people and flowed back to the people in the form of cash transfers (BR1M), healthcare subsidy (government hospitals and clinics), education (public schools and universities) and many more.

GST hasn’t really burdened the masses as alleged by certain quarters because most of the basic goods, services and amenities are charged at zero-rate and exempted by the government.

GST is also a form of re-distribution policy, from the top income group to the bottom and middle income group.The rich spend more money on luxury and imported items while the low and middle income group spend more on basic necessities which as I stated earlier are zero-rated and exempted from GST.

We always complain about how GST has burdened us all, made us poorer and all that we overlooked the benefits that GST has brought to our economy.

Even the complaint that GST has made goods and services become more expensive is not entirely accurate as I explained (in Malay) here.

Nobody could have predicted that oil prices would fall by more than 70% and The Prime Minister and the government were right to implement the GST despite of its unpopularity among Malaysians.

GST implementation was timely and might have prevented a deeper economic slowdown in our country.

I’m not asking all of us to be grateful or to praise the government but we need to be fair and at least acknowledge the fact that GST has brought more good than harm to us, the government and the economy.